The pendulum seems to have swung. After 12 months in which investment bankers have ruled the roost and gone about extolling 'integrated origination verticals', the investment banking pipeline is looking a bit less pumped than it was.
To be specific, investment banking fees which looked so certain a few months ago now look less of a done deal.
So far this autumn, Thomson Reuters and Freeman consulting estimate that banks have missed out on nearly $60m of fees from cancelled M&A deals and on another $55m of fees from cancelled IPOs. Suddenly,deals are failing at their fastest rate since 2008.
Meanwhile, as Credit Suisse's results amply illustrated this morning, resurgent volatility is doing good things for banks' fixed income sales and trading businesses. Yes, Credit Suisse's 50% year-on-year third quarter increase in trading revenues was flattered by a poor third quarter in 2013, but it wasn't inconsequential. Particularly as Goldman Sachs and Morgan Stanley's fixed income businesses didn't do too badly either.
The reality is that banks' investment banking division (IBD) and markets businesses counterbalance each other. When one is doing well, the other usually isn't. When the economic outlook is clear, interest rates are stable, and equity markets are rising, corporates will have the confidence to engage in M&A and companies will list on equity markets. When the economic outlook is unclear, when equity markets are declining, interest rates are diverging and currencies are fluctuating, there will be less M&A and IPO activity, but a lot more fixed income trading.
This is the situation banks find themselves in now. Since mid-October, volatility has risen but the FTSE 100 and S&P 500 have been in steep decline. Suddenly, banking executives are talking down the prospects for IBD and talking up the prospects for fixed income sales and trading. “We have seen a mixed start to October, with recent market volatility benefitting certain businesses across both divisions, while negatively impacting others," said Credit Suisse CEO, Brady Dougan cryptically this morning. And then - to clarify that the negative impact is likely to be felt in IBD, Dougan added: "We have a strong advisory and underwriting pipeline, but the pace of execution in the fourth quarter will depend on market conditions.”
The sudden turning of market sentiment against advisory businesses leaves banks looking a little behind the curve. Senior M&A hires made in the fourth quarter may find the party's over when they finally arrive post-gardening leave in early 2015.
Credit Suisse looks especially guilty of mistiming. The bank said today that it will be cutting staff from its equities and fixed income trading businesses. This comes after Credit Suisse said a few weeks ago that it was in the market for some more senior M&A staff. The M&A hiring follows the ill-advised dumping of 30% of its European directors and managing directors in IBD just before deals picked up in 2012.
Meanwhile, there are signs that banks might be rethinking staffing needs in their fixed income businesses. UBS has been spotted making some big hires across credit and rates trading. Barclays, which said in May that its investment bank was, "too exposed to volatility in FICC," and that the Barclays group was, "too exposed to volatility in the Investment Bank," has started talking up its volatility-led businesses again. "Now, importantly we're not exiting the Macro businesses," said Tom King last month. "We're deploying much less capital but keeping ourselves in position to capture volatility when and as it returns to the market."
Fixed income traders aren't in the clear. Leverage constraints and the increased capital cost of their trades aren't going to go away and their desks still stand to be buffeted by fines related to FX fixing and increased electronic trading. However, the unprecedentedly low volumes and low volatility that characterized 2014 may not persist into 2015. Fixed income is reviving. And all those newly hired M&A and ECM bankers may want to watch their backs.